Macron and the EUR

Does Emmanuel Macron’s victory in the French election signal a turning point for the single currency?


Macron’s decisive victory in the French presidential election yesterday, in which he garnered 66% of the vote, was met with indifference by the currency markets.  At the time of writing, EURUSD is trading at about 1.0950, the exact same level it rallied to following the 1st round of the election two weeks ago.   For many, a Macron triumph over the Marine Le Pen signifies nothing less than the decisive defeat of the Eurosceptic forces which brought us Brexit, and threatened to collapse the entire European project, including the euro itself.  If the high-water mark of European populism has now been reached, and the existential political risks facing the euro are in retreat, why has the currency not strengthened more dramatically?


Aside from the short-term reality that a Macron victory was largely priced in anyway, there are at least three other reasons specific to France which help explain why the EUR has not rallied following yesterday’s result:


  1. Macron’s victory was not as decisive as the headline results indicate. Low turnout (about 75%) and a remarkably high number of spoiled ballots (11.5%) mean that significantly less than half of the French electorate voted for Macron in a two-horse race.  In other words, this vote is not the ringing endorsement of Macron’s pro-EU stance that it might seem, especially when you consider that many of those who did vote for Macron were primarily voting against Le Pen.  According to exit polls, 43% of those who voted for Macron did so primarily to prevent a victory for the Front National.  In the first round of voting, over 40% of voters supported explicitly anti-EU candidates.


  1. Political risk has not been eliminated in France – parliamentary elections occur next month, and it is unlikely (though not impossible) that Macron’s brand-new party, En Marche, will be able to win a majority. This will make it difficult for Macron to implement his reform agenda and raises the risk of a disappointed electorate taking another look at the National Front next time around  – just as disillusioned Obama voters turned to Trump last year.        


  1. The French economy is still in pretty bad shape; Q1 GDP growth slowed to 0.3% and the French unemployment remains above 10% (the youth unemployment is more than double this level, close to 25%). This is not unrelated to the single currency, which is close to 10% overvalued for the French economy on a purchasing power basis (whilst remaining more than 10% undervalued for the German economy – highlighting the euro’s problem quite neatly!). 


EURUSD has effectively been trading in a 1.05 / 1.15 range for almost two and a half years.  Our view has long been that it is more likely that a break-out, when it inevitably occurs, will be to the down side.  Macron’s victory by itself, partly for the reasons laid out above, would probably not cause us to change this view.  However, when combined with the eurozone’s nascent economic recovery and a potential tightening of ECB policy, this easing of near term political risk does require us to reconsider our euro outlook.  At the very least, the probability of a short-term (<6 months) test of the 1.15 level has increased. 


In his victory speech yesterday, Mr Macron claimed that “a new chapter in our long history has been turned tonight.”  In a sense, of course, he is right.  Macron is the youngest French leader since Napoleon, and the first in the modern era who won the presidency without the direct support of the political establishment.  However, if his words were meant to signal a return to Europe’s status quo, we feel he may be confusing a temporary reprieve for an historic turning point. 


Author: Kevin Lester


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